Bonus season shows how little Wall Street has changed

Bonuses? Bank on it

Published 6:30 am, Tuesday, January 12, 2010

No one invited me to join the panel investigating the cause of the financial crisis. Had I been asked, I'd have had one question for the bank CEOs who will testify later today: What about the bonuses?

The bipartisan Financial Crisis Inquiry Commission begins hearings in Washington with CEOs of the four biggest U.S. banks. It's probably a coincidence that they're starting a week before Wall Street bonus season, that time when unrestrained greed gets its annual public viewing.

Goldman Sachs, ever the poster child for banker excess, is expected to top the bonus list by paying an average of almost $600,000 per employee. As of September it had already set aside $16.7 billion for bonuses.

My reason for asking the bonus question, though, isn't to tap into populist outrage or even to point out that the architects of the meltdown are wallowing in excess even as they still reek of federal bailouts.

The banks have already sought to dismiss such concerns with rationalizations for their exorbitant rewards. They argue that without the bonuses they'll lose their best employees and that the bonuses are tied to profits.

Those arguments ring hollow because the profits came with the government's help and the firms are already too big to fail. If they lose some employees, it only loosens their stranglehold on the economy.

But the bonus question remains. As outrageous as the amounts may be, the dollars are secondary to the structure of the pay itself.

The skewed incentive system on Wall Street and across the financial industry is at the very core of last year's economic crisis. Financial firms paid — and are still paying — hefty short-term rewards while ignoring the cost of long-term risk.

Many of the debt instruments that blew up last year contributed to the bonuses of 2005, 2006 and 2007, banner years all. Since going public in the 1980s and 1990s, Wall Street firms have shifted risk once borne by their partners onto their shareholders and, ultimately, taxpayers.

Bankers who once had their wealth tied up in their firms now have casinos stocked with other people's money.

Rather than address the problem, the banks opt to combat public anger with PR maneuvers. Goldman, according to reports this week, plans to require some of its top executives to donate a percentage of their bloated bonuses to charity. It shows Goldman doesn't really understand the problem.

Be rich the easy way

Every major U.S. bank began last year on the government dole. By that measure alone, no one on Wall Street deserves a bonus.

Don't expect such a suggestion to crop up in today's hearings. The financial industry is so steeped in a sense of bonus entitlement that such an idea is considered outrageous.

The big banks have institutionalized the idea that you should get rich without succeeding.

Goldman is expected to announce a record 2009 profit of $12 billion, but we have no idea what new risks Goldman is assuming in generating those profits or what new toxic instruments it's embracing that might sow the seeds of the next crisis.

Nor do we know what we will have to pay — now that taxpayers are the guarantors of Wall Street risk — to bail it out of the next crisis.

Bank executives have decried the U.K.'s decision to impose a “supertax” on bonuses. The biggest flaw with that plan is that the banks pay the tax, which punishes shareholders and, ultimately, taxpayers anew. But a supertax on individuals might force bankers to think twice about doing any deal just to hit their numbers.

Of course, we wouldn't need a government solution if the banks themselves were willing to restructure compensation to account for long-term risk. Instead, based on what we've seen so far, the answer to what bank executives are doing to reform the incentive structure is “nothing.”

Which raises another, even more disturbing, question: “What's changed?”